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May 2016

New PSC register

As from 6 April 2016, companies and LLPs (with only very limited exceptions) will be required to hold and keep available for inspection a register of people with significant control over the company/LLP (PSC Register).

This is a major administrative change which will apply to the vast majority of UK companies and LLPs. Directors and Company Secretaries will need to acquaint themselves with the new rules and consider how they will apply as soon as possible.

The measures are being brought in to further increase the visibility of those in control of UK companies and LLPs, and to deter and penalise those controllers who seek to disguise their interests.

In summary, the obligations are to investigate, obtain and keep updated information on registrable persons and relevant legal entities with significant control over the company. A PSC register will need to be created which needs to include required particulars of each person with significant control over the company who is a registrable person.

It will be necessary to take reasonable steps to find out if there are people who have significant control over a company/LLP, make contact with them to confirm whether they meet one or more of the conditions and, if they do, obtain the relevant information to include on the company’s PSC register.
The PSC register will also need to be monitored, updated when necessary and reviewed at least annually so add this to your calendar of monitoring of policies/procedures etc.

A person with significant control (and who will need to be included on a company’s PSC Register) is defined in the Act as a person who directly or indirectly:

holds more than 25% of the company’s shares; or

holds more than 25% of the company’s voting rights; or

has the right to appoint or remove a majority of the company’s directors; or

has the right to exercise, or does exercise, significant influence or control over the company; or

has the right to exercise, or does exercise, significant influence or control over the activities of a trust, and that trust meets one or more of the above four conditions.

Failure to comply with the new regime is a criminal offence by individuals, relevant legal entities, the company and every officer in default. This is punishable by a fine or up to two years in prison.

Supreme Court clarifies penalty rule

The Supreme Court has handed down a highly-anticipated decision in a case involving penalty clauses in a share purchase agreement.

In Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis, the Supreme Court unanimously allowed the buyer’s appeal against the Court of Appeal decision, and found that two clauses in a share purchase agreement were not unenforceable penalties. The disputed clauses stipulated that if the seller breached the restrictive covenants included in the SPA he would:

Lose his entitlement to receive deferred payments that would otherwise be due to him for the sale of his shares in the target company.

Be obliged to sell his remaining shares in the target to the buyer at a price excluding the value of goodwill.

The court found that the first provision was, in reality, a price adjustment clause that formed part of the seller’s primary obligations under the SPA. The effect of the clause was that the seller earned the consideration for the shares not only by transferring them to the buyer, but by observing the restrictive covenants. The court went on to find that, in any event, the buyer had a legitimate interest in the seller’s observance of the restrictive covenants that went beyond the measure of loss attributable to the breach. The goodwill of the target’s business was critical to its value to the buyer, and the seller’s loyalty was critical to preserving the goodwill.

In relation to the second clause, which contained the pricing formula for the sale of the seller’s retained shares in the event of a breach of the restrictive covenants, the court found that this reflected the reduced consideration which the buyer would have been prepared to pay on the hypothesis that it could not count on the seller’s loyalty. The clause was also justified by the same legitimate interest as the first provision, being an interest in matching the price of the retained shares to the value that the seller was contributing to the target’s business. While the court acknowledged that the clause could be expected to influence the seller’s post-completion conduct, and to that extent may be described as a deterrent, this was not objectionable unless its object was to punish. In this instance, the court considered that the price formula in the disputed clause had a legitimate function which had nothing to do with punishment and everything to do with the buyer’s commercial objective in acquiring the target’s business.

As well as in a share purchase context the subject matter of the case will be of interest to companies which regularly negotiate default and non-compete clauses.

Consumer Rights Act 2015

The main provisions of the Consumer Rights Act 2015 (CRA) relating to goods, digital content, services and unfair terms and notices came into force towards the end of last year, making substantial changes to the UK’s consumer law regime. Since then further provisions have come into force.

The CRA modernises and simplifies key parts of the UK’s consumer protection rules, consolidating certain key rules in one place. The CRA has also introduced:

New rights and remedies specifically for digital content.

New statutory remedies where services are not carried out with reasonable care and skill or as agreed with the consumer.

A new short-term right to reject faulty goods within 30 days and get a refund. The concept of "acceptance" no longer applies.

In the light of this all businesses which deal with consumers should review their terms and conditions of trading.

TUPE and employees who are temporarily laid off

Employees temporarily laid off work at the time of a service provision change can still be part of an organised grouping of employees and transfer to the subsequent contractor. Remitting a case back to the employment tribunal, the EAT held that a temporary absence from work, or cessation from work, did not in itself deprive employees who had been involved in the relevant activities of their status as an organised grouping of employees. There was nothing in regulation 3 of TUPE or in the case law authorities which required the organised grouping of employees to be actually engaged in the relevant activities immediately before the transfer.

While previous case law has established that the temporary cessation of a business will not necessarily prevent a business transfer taking place, it is helpful to have a case that considers that case law specifically in relation to a service provision change.

Meaning of new customer for indemnity purposes in the Commercial Agents Directive

The European Court of Justice has considered the meaning of new customers in Article 17(2) of the Commercial Agents Directive (86/653/EC), which provides that upon the termination of a commercial agency agreement, the agent shall be entitled to an indemnity if and to the extent that the agent has brought "new customers" to the principal.)

The issue for the ECJ was whether "new customers" means brand new customers that, prior to that agent, did not have a previous business relationship with the principal at all. Or could it include customers who are new only in relation to the specific goods sold by that agent (so the customer could already have an existing relationship with the principal for other goods which are not covered by that agent)?

The ECJ held that Article 17(2) should include existing customers who are new just to the specific goods which the agent was selling. The ECJ said that it was necessary to adopt a non-restrictive interpretation of the Directive in order to protect the position of commercial agents. As such, customers brought in by the agent for the specific goods which are assigned to him must be regarded as new customers, even if those customers already have a business relationship with the principal in relation to other goods.

New Regulations for direct marketing phone calls

From 16 May 2016 all direct marketers must display their telephone numbers, when making or instigating automated or live direct marketing telephone calls. This applies to all UK registered companies even if their call centres are based abroad.

The Privacy and Electronic Communications (EC Directive) (Amendment) Regulations 2016 (SI 2016/524) will amend regulation 19 (automated calls) and 21 (live telephone calls) of the Privacy and Electronic Communications (EC Directive) Regulation 2003 (SI 2003/2426), so that the person making or instigating the call "does not prevent presentation of the identity of the calling line on the called line" or "presents the identity of a line on which he can be contacted". This requirement relates to both solicited and unsolicited live direct marketing telephone calls.

The amendments will not only make it easier for consumers to refuse and report unwanted marketing calls but also help to ensure that the Information Commissioner’s Office (ICO) can investigate and take enforcement action against those who flout the rules. Organisations risk large fines for failing to comply as the ICO can levy a monetary penalty of up to £500,000 and Ofcom (which considers "abandoned" or "silent calls" created by automated dialling systems to constitute persistent misuse of an electronic communications network or service) can issue a monetary penalty of up to £2,000,000.

2016 Budget

The key recent announcements for businesses were:

Corporation tax cut to 17% from April 2020, accompanied by new restrictions on use of carried forward losses.

The top rate of CGT reduced from 28% to 20% from April 2016 (other than for residential property and carried interest) and entrepreneurs’ relief extended to longer term investors in unlisted companies.

Overseas property developers to be brought within the charge to UK tax during 2016.

Employment termination payments that are subject to income tax on amounts in excess of £30,000 will be subject to employer NICs from 2018.

From April 2017, a fixed ratio rule will limit corporation tax deductions for net interest expense to 30% of a group’s UK earnings before interest, tax, depreciation and amortisation (EBITDA), with a group ratio rule based on the net interest to EBITDA ratio for the worldwide group.

A new SDLT rates structure for sales and leases of non-residential and mixed property applies from 17 March 2016, with increased charges for higher value transactions.